Question

A) Define monopolistic competition, and discuss the importance of product differentiation.

B) Give at least three examples of monopolistically competitive industries.

C) In each case, what is the basis of its product differentiation?

Answer 1

A. Monopolistic competition is a market where

• Products are closely related
• No barriers to entry and exit
• Large sellers and large buyers

Monopolistic competition totally depends on the product differentiation which means the products are very closely related to each other in terms of Shape, size, color, etc.

It is very important for the monopolistic competition to have product differentiation because to stand out from the competitors and they do it by various techniques like branding, promotion, advertisement, etc

B. Three examples of a monopolistic competitive market are toothpaste industry, bakery shops, and restaurants.

C. In the toothpaste industry, the differentiation is based on size, color, and packaging

In the bakery shop, the products are closely differentiated in terms of the shape of bakery items like bread, muffins, etc

In restaurants, as we all know the raw materials are almost the same but the way they make food in terms of taste, the color of the food makes them different from the competitors.